How to Write a LP update as a VC?

As a VC, one of the most important aspects of your role is to effectively communicate with your LPs about the performance and status of their investments. LP updates are a crucial tool in this communication, providing valuable information to LPs on the fund's progress and future plans. In a competitive market, the quality of your updates can be a key differentiator, impacting the level of trust and confidence LPs have in your fund. However, crafting high-quality LP updates can be challenging, especially given the amount of information that needs to be conveyed. In this article, we will explore the key components of an effective LP update, including the purpose of an LP update, principles to consider in writing one, how to differentiate the quality of your updates, and an example outline and template.

Contents

• Purpose of an LP update
• Benefits to the VC in providing an LP update
• 8 principles to follow in providing an LP update
• How to efficiently provide an LP update
• Outline of an LP update
• Template for an LP update
• Concluding thoughts

Purpose of an LP update

At its core, the purpose of an LP update is to inspire trust and confidence in you as the VC. Transparency and accurate reporting of your funds’ and portfolio companies’ performance are key to building trust. The LP update is a vehicle for 2-way communication - a means of regularly keeping the LP updated on their investments but also a way to seek advice and support portfolio companies in their search for talent by tapping into the LPs’ networks. 

On the other hand, the LP update is not intended to provide investment advice, recommend specific investments or guarantee the performance of current investments. Likewise, it is not intended to focus solely on performance as it overlooks qualitative elements such as the fund’s strategies and portfolio companies’ non-financial successes. Finally, the LP update should avoid overloading investors with information and seek the right balance.

Benefits to the VC in providing an LP update 

In addition to inspiring trust and getting support for portfolio companies, three secondary benefits include:

• Support in future fundraising efforts by demonstrating your fund's track record and expertise to investors

• Increased accountability of the VC to ensure that the fund is making progress towards its goals
• Ensuring compliance as LP updates are legally required in some jurisdictions. For example, in the US, VC funds registered with the SEC are subject to reporting requirements under the Investment Company Act (1940), such as providing their investors with regular financial statements and other information, such as LP updates, on a periodic basis.

8 principles to follow in providing an LP update

Each VC will have their own way of communicating updates and the content they choose to include in it. However, there are certain principles that are non-negotiable in high-quality LP updates. They are:  

1. Prioritize key info upfront

Items shared in an LP update should be determined by what the founders of the portfolio companies are comfortable sharing and by what matters most to the LPs. Examples of key points to cover are fund performance, major deals, follow-on rates, and press coverage. Once addressed upfront, the details behind it can be shared later. 

2. Provide quantitative and qualitative data

Quantitative data that should be part of every update includes: financials, customer, sales, and  product data. The “so-what” of this data should be provided to LPs to explain why the portfolio companies are performing well or failing to meet expectations. In addition to the data-led narrative, a detailed view of changes in each portfolio company can be shared via Sheets or Airtable.

Qualitative data can include any new companies added to the portfolio since the last update. Information on what the company does, the team behind it, and the reasons for investing should be provided. 

3. Clarity

There should be no sugarcoating in the updates. LPs understand investing in start-ups is inherently risky, and if only a positive view is shared, LPs could lose trust in you or believe you are not opportunistic enough. 

4. Share updates through multiple sources

Updates can be shared via email, PDF, Google Docs, video, or a webcast with Q&A. This gives LPs the opportunity to review their investments’ performance using their preferred means. For example, send a video update with a link to the detailed report.

5. Transparency

Changing metrics or the calculation logic is a quick way to break trust with LPs. It is important that the same metrics are shared from month to month. Talk with your investors and discuss what types of metrics they’d like to see.

6. Formatting

The update should be visually simple and easy to read on multiple devices, including a phone or tablet.

7. Frequency

The minimum frequency is to send an update at least once per quarter. If something important happens between updates, this can be shared in real-time, provided the founders consent to it. Whatever the frequency, it is crucial that it is kept consistent.

8. Personalization

Customizing updates to the specific interests and priorities of individual limited partners, VCs can demonstrate that they value each investor's perspective and take their feedback into account. This can include providing tailored updates based on the type of investment and the investment goals of each LP.

How to efficiently provide an LP update

Writing an update is a lot of hard work involving researching, communicating, collating, and structuring information from many sources and presenting it in an easy-to-read, digestible manner for LPs. Some best practices that can be leveraged here include: 

• Automation: through the use of AI-based large language models (like ChatGPT) to help research emerging trends, summarize the competitive landscape, and more. We recently wrote about a few innovative ways this can be applied to manage day-to-day work as a VC. 
• ‍Start with a template: Visible.vc has a library of update templates designed to make it easier for investors to send regular, engaging updates to their LPs. Check out the investor update template library here.  
• Streamline your workflows: through the use of shared documents to gather data from portfolio companies. For example, this can be a Google Sheets or Docs that is updated periodically by portfolio companies; rather than sharing data via emails. You can also use solutions like Rundit for it.‍
• Standardize reporting metrics: use specific operational definitions to ensure there’s no room for ambiguity. For portfolio companies, identify key metrics relevant to their sector. For example, SaaS companies use metrics like ARR and MRR, and e-commerce companies use monthly revenue and operating margins.‍
• Modular templates: these have standard sections relevant to each investor, with specific sections reserved for tailoring and customization. 

Outline of an LP update

The below outline is comprehensive and will need to be prioritized to focus on the most relevant sections for your LPs. 

1. Introduction 

2. A short summary of new investments and follow-ons

3. Financial Results 

• Fund performance metrics like total return, internal rate of return (IRR), net asset value (NAV), and cash distributions.
• Portfolio company updates such as the number of portfolio companies, value of each investment, markups on portfolio companies since the last update, and distributions of investments by sector or stage
• Comparison to benchmarks such as the S&P 500 or the NASDAQ
• Link to a detailed snapshot comprising company name, description, website URL, category, and applicable fund invested through. 

4. Market Analysis 

• Economic outlook including relevant economic indicators
• Emerging trends 

5. Fund Strategy 

• Any shifts in investment focus since prior updates
• Recent transactions - may include metrics such as the number of new investments, number of exits and value of investment capital deployed 
• Portfolio additions including the amount invested, why the investment was made, what the company does, background on the founder and team, and co-investors in the deal.
• Portfolio updates, including new product releases, press, company blog posts, and “asks” from the founders.
• Future outlook

6. Personal updates or Closing comments 

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Template for an LP update

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Concluding thoughts

Writing effective LP updates not only helps you communicate effectively with your LPs but also fosters trust and confidence in the fund. When done well, LP updates can provide a wealth of information, demonstrating the fund's progress and future plans. By including financial metrics, addressing LPs' expectations, and differentiating the quality of updates, you can create a lasting impression and establish your fund as a leader in the industry. With this article, you now have the tools you need to write LP updates that inform, engage, and drive results. Start implementing these tools today and take your LP updates to the next level. Your LPs will thank you for it!